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Is top UK growth stock Fevertree now a buy?

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From market darling to pariah, it’s fair to say that the last couple of years have been eventful for tonic water titan Fevertree Drinks (LSE: FEVR).

Changing hands for near-4,000p a pop in 2018, the company’s share price tanked to just 900p during March’s market crash. Since then, it’s more than doubled.

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Could the worst be over? Today’s half-year results suggest a tentative ‘yes’. There’s just one catch.

Fevertree exceeds expectations

Like other UK-listed companies in the drinks sector, Fevertree was always likely to be hit by the lockdown. While people could still enjoy a tipple at home, it was inevitable that the closure of pubs, bars, and restaurants across the country and beyond would hit sales. This also came at a difficult time for the £2.5bn cap as concerns grew over its ability to continue growing earnings at its previous rate.

Today, however, the company reported that off-trade sales had exceeded expectations and helped to mitigate the impact of Covid-19. This is not to say that all the headline numbers were necessarily pretty. 

Despite maintaining its position as the number one brand in the UK, revenue from its home market slumped 20% to £48.3m over the six months to the end of June. In Europe, revenue fell 29% to £20.5m.

Elsewhere, the figures were far more encouraging. In the US — a key growth market for the company — revenue rose 39% to £27.4m. This was way ahead of what was forecast and, when combined with a slight increase in its remaining markets, led Fevertree to report an 11% dip in sales overall (£104.2m). Not great but hardly disastrous.

Adjusted earnings before interest, tax, depreciation and amortisation (EBITDA) fell 35% to £23.8m. Margins also declined.

Positive outlook

All told, I think it likely that long-term holders of the stock will be fairly reassured by today’s results. The fact that Fevertree has continued to invest in marketing and its online platform during the pandemic (as well as recruiting new staff) doesn’t smack of a company in trouble. The post-period-end purchase of German distributor Global Drinks Partnership also bodes well, as does news on recent trading.

According to CEO Tim Warrilow, Fevertree has seen “an encouraging start to the second half of the year” and once free of the coronavirus, should be “in an even stronger position” than it was previously.

In the meantime, Fevertree’s finances continue to look rock-solid. The company had net cash of £136.9m at the end of the reporting period. This is up 32% from June 2019.

As positive as all this is, however, I’m still put off by the price investors are being asked to pay to acquire the stock. 

Fizzy valuation

A quality business usually commands a high price and Fevertree is no exception. At 59 times forecast earnings, however, the valuation is undeniably steep. High margins and returns on capital employed aside, that doesn’t translate to an appealing risk/reward trade-off from my perspective. After all, the coronavirus still hasn’t gone away. Indeed, things could still get worse before they get better.

Taking this into account, it’s perhaps no wonder that some traders decided to bank profits early this morning. If you’re tempted to buy the stock, just ensure you’re nicely diversified elsewhere.

A Top Share with Enormous Growth Potential

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But its capital-light, highly scalable business model has previously helped it deliver consistently high sales, astounding near-70% margins, and rising shareholder returns … in fact, in 2019 it returned a whopping £150m+ to shareholders in dividends and buybacks!

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While COVID-19 may have thrown the company a curveball, management have acted swiftly to ensure this business is as well placed as it can be to ride out the current period of uncertainty… in fact, our analyst believes it should come roaring back to life, just as soon as normal economic activity resumes.

That’s why we think now could be the perfect time for you to start building your own stake in this exceptional business – especially given the shares look to be trading on a fairly undemanding valuation for the year to March 2021.

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Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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